Civil Engineering

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Fundamentals of Engineering Economics -
Machine Rates Problems Lecture # 19

Engr. Shad Muhammad

Lecturer
Department of Civil Engineering
COMSATS University Islamabad, Sahiwal Campus.
Lecture # 18 _ Analysis of Capital and Operating Costs of
Construction Equipment (Summary) 2
Table of Content
• Introduction to Machine / Equipment Rates
• Machine / Equipment Rates – Objectives
• Definitions
1. Purchase Price (P)
2. Economic Life (N)
3. Salvage Value (S)
• Classification of Costs
1. Fixed Costs / Ownership Cost
a) Initial cost,

b) Salvage value,

c) Interest cost or cost of capital investment,

d) Taxes,

e) Insurance cost, and

f) Storage cost

g) Depreciation
2. Operating Costs
3. Labor Costs

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Lecture # 19 _ Fundamentals of Engineering Economics - Machine
Rate (Problems) 3
Table of Content
• Time Value of Money
1. Simple Interest
2. Compound Interest
• Equivalence
• Quantifying Alternatives for Decision Making
• Cash Flow Diagram
• Compound Interest Factors
a) Single Payment Compound Amount Factor (SPCAF)
b) Single Payment Present Worth Factor (SPPWF)
c) Uniform Series Present Worth Factor (USPWF)
d) Capital Recovery Factor (CRF)
e) Uniform Series Compound Amount Factor (USCAF)
f) Sinking Fund Factor (SFF)
• Machine Rates - Problem # 1
• Machine Rates - Problem # 2
• Machine Rates - Problem # 3

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals 4
Time Value of Money

✓ The time value of money is important when one is interested either in investing or borrowing the
money.
✓ If a person invests his money today in bank savings, by next year he will definitely accumulate more
money than his investment.
✓ This accumulation of money over a specified time period is called as time value of money.
✓ Similarly, if a person borrows some money today, by tomorrow he has to pay more money than the
original loan. This is also explained by time value of money.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals 5
Time Value of Money

✓ The time value of money is generally expressed by interest amount. The original investment or the
borrowed amount (i.e. loan) is known as the principal.
✓ The amount of interest indicates the increase between principal amount invested or borrowed
and the final amount received or owed.
✓ In case of an investment made in the past, the total amount of interest accumulated till now is given
by;
Amount of interest = Total amount to be received - original investment (i.e. principal amount)
✓ Similarly in case of a loan taken in past, the total amount of interest is given by;
Amount of interest = Present amount owed - original loan (i.e. principal amount)

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals 6
Time Value of Money

✓ In both the cases there is a net increase over the amount of money that was originally invested or
borrowed.
✓ When the interest amount is expressed as the percentage of the original amount per unit time, the
resulting parameter is known as the rate of interest and is generally designated as ‘i’.
✓ The time period over which the interest rate is expressed is known as the interest period.
✓ The interest rate is generally expressed per unit year. However, in some cases the interest rate may
also be expressed per unit month.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 7
1. Simple Interest
✓ The interest is said to simple, when the interest is charged only on the principal amount for the
interest period. No interest is charged on the interest amount accrued during the preceding interest
periods. In case of simple interest, the total amount of interest accumulated for a given interest period is
simply a product of the principal amount, the rate of interest and the number of interest periods.
It is given by the following expression.

Where, IT = total amount of interest

P = Principal amount
n = number of interest periods
i = rate of interest

✓ Simple interest reflects the effect of time value of money only on the principal amount.
Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 8
2. Compound Interest
✓ The interest is said to be compound, when the interest for any interest period is charged on
principal amount plus the interest amount accrued in all the previous interest periods.
✓ Compound interest takes into account the effect of time value of money on both principal as well as
on the accrued interest also.
✓ In case of simple interest, the amount of interest accumulated each year is constant.
✓ However in case of compound interest, the interest amount accumulated at the end of each year is
not constant and increases with interest period.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 9
2. Compound Interest

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 10
Equivalence
✓ Equivalence indicates that different amount of money at different time periods are equivalent by
considering the time value of money.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 11
Equivalence
✓ The equivalent value of an amount that is borrowed now, at future time period at a given interest rate
depends on the type of interest, whether simple or compound; and the different loan repayment
arrangements, like payment of accumulated interest annually, and principal at the end of the stipulated
interest periods; or payment of both the principal, and interest at the end interest periods; or payment of
uniform amounts annually, that comprises a portion towards the payment of principal amount and
remaining for the accumulated interest throughout the interest periods.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 12
Quantifying Alternatives for Decision Making
✓ Quantifying alternatives for any item is the most important aspect of decision making for selecting
the best option.
✓ For example, a construction company is planning to purchase a new concrete mixer for preparing
concrete at a construction site. Let's say there are two alternatives available for purchasing the mixer;
a) an automatic concrete mixer
b) a semi-automatic concrete mixer.

Then, the task is to find out best alternative that the company will purchase that will yield more
profit.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 13
Quantifying Alternatives for Decision Making
✓ For this purpose one has to quantify both the alternatives by the following parameters;
• The initial cost that includes purchase price, sales tax, cost of delivery and cost of assembly
and installation
• Annual operating cost.
• Annual profit which will depend on the productivity i.e. quantity of concrete prepared.
• The expected useful life.
• The expected salvage value.
• Other expenditure or income (if any) associated with the equipment.
• Income tax benefit

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 14
Quantifying Alternatives for Decision Making
✓ Then, on the basis of the economic criteria, the best alternative is selected, by calculating the present
worth or future worth or the equivalent uniform annual worth of both alternatives by incorporating the
appropriate interest rate per year and the number of years (i.e. the comparison must be made over
same number of years for both alternatives).
✓ Then the concrete mixer with least cost or higher net income is considered for purchase.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 15
Quantifying Alternatives for Decision Making
✓ In addition to economic parameters as mentioned previously, the non-economic parameters namely
environmental, social, and legal and the related regulatory and permitting process must also be
considered for the evaluation and selection of the best alternative.
✓ These non-economic parameters are essentially required for the selection of the best alternative for
the infrastructure and heavy construction projects like dams, bridges, roadways etc. and other
publicly and privately funded projects namely office buildings, hospitals, apartment building and
shopping malls etc.
✓ When the available alternatives exhibit the same equivalent cost or same net income, then the non-
economic parameters may play a vital role in the selection of the best alternative. It may be noted here
that the non-economic parameters cannot be expressed in numerical values.
Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 16
Cash Flow Diagram
✓ The graphical representation of the cash flows i.e. both cash outflows and cash inflows with
respect to a time scale is generally referred as cash flow diagram.
✓ The cash flows are generally indicated by vertical arrows on the time scale.
✓ The cash outflows (i.e. costs or expense) are generally represented by vertically downward
arrows, whereas, the cash inflows (i.e. revenue or income) are represented by vertically upward
arrows.
✓ In the cash flow diagram, number of interest periods is shown on the time scale. The interest period
may be a quarter, a month or a year. Since the cash flows generally occur at different time intervals
within an interest period, for ease of calculation, all the cash flows are assumed to occur at the end
of an interest period.
Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 17
Cash Flow Diagram

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 18
2. Compound Interest Factors
✓ The compound interest factors and the corresponding formulas are used to find out the unknown
amounts at a given interest rate continued for certain interest periods from the known values of
varying cash flows.
P = Present worth or present value
F = Future worth or future sum
A = Uniform annual worth or equivalent uniform annual worth of a uniform series continuing over a specified
number of interest periods
n = number of interest periods (years or months)
i = rate of interest per interest period i.e. % per year or % per month

✓ Unless otherwise stated, the rate of interest is compound interest, and is for the entire number of
interest periods i.e. for ‘n’ interest periods.
Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 19
2. Compound Interest Factors

✓ While deriving the different compound interest factors, it is assumed that the interest is compounded
once per interest period i.e. discrete compounding.
✓ Further the cash flows are assumed to be discrete i.e. they occur at the end of interest period.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 20
2.1 Single Payment Compound Amount Factor (SPCAF)
✓ The single payment compound amount factor is used to compute the future worth (F) accumulated after
“n” years from the known present worth (P) at a given interest rate ‘i’ per interest period. It is assumed
that the interest period is in years and the interest is compounded once per interest period.
✓ The known present worth (P), unknown future worth (F) and the total interest period ‘n’ years are shown
in Fig. 1.7.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 21
2.2 Single Payment Present Worth Factor (SPPWF)
✓ The single payment present worth factor is used to determine the present worth of a known future
worth (F) at the end of “n” years at a given interest rate ‘i’ per interest period.
✓ The present worth (P), future worth (F) and the total interest period ‘n’ years are shown in Fig. 1.8.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 22
2.3 Uniform Series Present Worth Factor (USPWF)
✓ The uniform-series present worth factor is used to determine the present worth of a known uniform
series. Let ‘A’ be the uniform annual amount at the end of each year, beginning from end of year „1‟ till
end of year ‘n’.
✓ The known ‘A’, unknown ‘P’, and the total interest period ‘n’ years are shown in Fig. 1.9. This cash flow
diagram refers to the case; if a person wants to get the known uniform amount of return every
year, how much he has to invest now.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 23
2.4 Capital Recovery Factor (CRF)
✓ The capital recovery factor is generally used to find out the uniform annual amount ‘A’ of a uniform
series from the known present worth at a given interest rate ‘i’ per interest period.
✓ This cash flow diagram indicates, if a person invests a certain amount now, how much he will get
as return by an equal amount each year.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 24
2.5 Uniform Series Compound Amount Factor (USCAF)
✓ The uniform series compound amount factor is used to determine the future sum (F) of a known
uniform annual series with uniform amount ‘A’.
✓ This cash flow diagram states that, if a person invests a uniform amount at the end of each year
continued for ‘n’ years at interest rate of ‘i’ per year, how much he will get at the end of ‘n’ years.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 25
2.6 Sinking Fund Factor (SFF)
✓ The sinking fund factor is used to calculate the annual amount ‘A’ of a uniform series from the
known future sum ‘F’. This cash flow diagram indicates that, if a person wants to get a known future
sum at the end of ‘n’ years at interest rate of ‘i’ per year, how much he has to invest every year by an
equal amount.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Engineering Economics – Fundamentals
Time Value of Money 26
Interest Factors

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 1 27
Future Cost
Present Cost
✓ The initial cost of a piece of construction equipment (pneumatic tire mounted) is Rs.55,00,000. The
estimated salvage value of the equipment is Rs.9,00,000. The useful life of the equipment is 10
years. The equipment will operate 2,000 hours per year. The cost of one set of tires is Rs.4,00,000. A
new set of tires will be replaced at the end of every 3 years of operation. In addition a repair work of
cost Rs.4,50,000 is expected at the end of year ‘6’. The interest rate is 8% per year.
Fixed Cost + Operating Cost

✓ Find out the total cost per hour for the construction equipment considering time value of money.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 1 28
Solution:
✓ For calculating the hourly ownership and operating cost by considering time value of money, first the
equivalent uniform annual cost is calculated at the given interest rate and is then divided by the
number of operating hours per year.
✓ As the initial cost includes cost of tires, tire cost is subtracted from initial cost of the equipment for
calculating ownership cost, as cost of tires is considered as an element of operating cost.
Ownership Cost does not include Tire
(Operating Cost component)

Uniform Annual Cost, when

Present Cost is given

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 1 29
Solution:
Salvage Value: Future Cost

Uniform Annual Cost, when

Future Cost is given

Uniform Annual Cost – Salvage Value

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 1 30
Solution:

✓ Equivalent uniform annual worth of tire cost: A3

✓ The equipment will require 3 sets of replacement tires in addition to the original set. The first
replacement set will be required at the end of 3rd year, second set at the end of 6th year, and third set
at the end of 9th year. In order to find out the equivalent uniform annual worth of tire cost, first the
equivalent present worth of cost of replacement tires is calculated using the appropriate compound
interest factor followed by adding it to the cost of original set (initial set) of tires and then converting the
equivalent present worth to equivalent uniform annual cost over the entire useful life of 10 years using
the appropriate compound interest factor.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates Uniform Annual

Problem # 1
Present Cost, when Future Cost is Known
31
Cost, when
Present Cost is
Solution: Known

Present Cost, when Future Cost is Known

Uniform Annual Cost, when

Present Cost is Known
Tire Replacement
Cost +
Repair Work Cost

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 2 32

✓ For a piece of construction equipment mounted on pneumatic tires, find out the hourly ownership cost
using average annual investment method with straight line depreciation from the following data;
Initial cost = Rs.80,00,000, Estimated salvage value = Rs.13,50,000,
Useful life of the equipment = 11 years, Cost of a set of tires = Rs.6,00,000.
✓ The equipment will operate 1800 hours per year. The interest rate on investment is 7.5% per year. The
annual rates for taxes, insurance and storage cost are 3%, 2.5% and 1%, respectively. For this
equipment, also calculate the hourly tire cost by not considering time value of money, if a new set of
tires will be replaced at the end of every 4 years of operation, and the estimated tire repair cost is 15%
of straight-line depreciation.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 2 33
Solution:

✓ As the initial cost includes cost of tires, tire cost is subtracted from initial cost of the equipment for
calculating ownership cost.
✓ Initial cost less cost of tires (P) = Rs.80,00,000 – Rs.6,00,000 = Rs.74,00,000
✓ Salvage value (SV) = Rs.13,50,000, Useful life (n) = 11 years
✓ The average annual investment (AAI) is calculated and is presented below.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 2 34
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 2 35
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 2 36
Solution:
✓ Hourly tire cost (by not considering time value of money)
✓ The hourly tire cost is equal to the sum of hourly tire use (replacement) cost, and hourly tire repair cost.
✓ The hourly tire use cost is obtained by dividing the cost of a set of tires by the life of tires in
hours.
✓ The hourly tire repair cost is equal to 15% of the hourly depreciation (straight-line) cost of tires. The
total depreciation cost of a set of tires over its estimated life is equal to its initial cost as its salvage
value is assumed as zero.
✓ As mentioned in the question, a new set of tires will be replaced at the end of every 4 years of operation
and the equipment will operate 1800 hours per year. Thus, the life of a set of tires is equal to 7200
hours (1800 x 4).
Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 2 37
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 3 38

✓ Examples of machine rates for a power saw, a tractor, a team of oxen, and a truck are in the
following tables. Although the machine rates in Tables 3.5 to 3.8 share the same general format, there is
flexibility to represent costs that are specific to the machine type, particularly in the calculation of the
operating costs. For the power saw (Table 3.5), major operating expenses are identified with the chain,
bar, and sprocket so they have been broken out separately. For the oxen (Table 3.7), the fixed costs
have been divided into major cost components specific to maintaining animals, in addition to
depreciation. For the truck (Table 3.8), costs have been divided in standing costs and traveling costs to
differentiate between costs when the truck is standing by, being loaded, or unloaded as compared to
traveling costs.

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 3 39
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 3 40
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 3 41
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
Machine Rates
Problem # 3 42
Solution:

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com
 Thank-you for Listening! 43

Country economics does not consider the appropriateness of earning sources!

(Shad)

Engr. Shad Muhammad, Lecturer, Department of Civil Engineering, COMSATS University, Sahiwal. Website: www.mytrustworth.com